Int. J. Internet and Enterprise Management, Vol. 3, No.

4, 2005 1

Managing constrained capacity: a simulation study

Eldon Y. Li
Department of Information Management, College of Commerce,
National Chengchi University, 64, Sec. 2, Zhi-nan Rd., Wenshan, Taipei
11605, Taiwan
Fax: +886-2-2939-3754 E-mail: eli@calpoly.edu.

Joseph R. Biggs*
Orfalea College of Business, California Polytechnic State University,
San Luis Obispo, CA 93407, USA
Fax: +1-805-756-1473 E-mail: jbiggs@calpoly.edu.
*Corresponding author

Emil A. Thies
College of Business Sciences, Zayed University, P.O. Box 4783,
Abu Dhabi, United Arab Emirates
Fax: +971-2-443-4847 E-mail: emil.thies@zu.ac.ae

Abstract: This research focuses on the use of constrained capacity availability

as a managerial decision variable in production systems. A simulation model
was used to evaluate production system performance at various levels of
constrained capacity before additional incremental levels of capacity were
added. The results indicate that as levels of available capacity approached
planned demand levels, or as demand approached capacity levels, the system
performance declined. This deterioration of system performance begins at
some capacity level higher than average production requirements. That is, at
100% planned capacity utilization, system performance is considerably
degraded, suggesting the need for local managerial manipulation of short-term
available capacity levels. In addition, this paper reviews several issues related
to constrained capacity and bottleneck management that need clarification.

Keywords: Capacity management, capacity constraint, inventory level, service

level, production management, bottleneck.

Reference to this paper should be made as follows: Li, E.Y., Biggs, J.R., and
Thies, E.A. (2005) ‘Capacity management, capacity constraint, inventory level,
service level, production management, bottleneck’, Int. J. Internet and
Enterprise Management, Vol. 3, No. 4, pp.000-000.

Biographical notes: Eldon Y. Li is University Chair Professor of the College of

Commerce at the National Chengchi University in Taiwan. He was Professor
and Dean of College of Informatics at Yuan Ze University in Taiwan during
2003-2005. He was a professor and the Coordinator of MIS Program at the
College of Business, California Polytechnic State University, San Luis Obispo,
California, U.S.A. He visited the Department of Decision Sciences and
Managerial Economics at the Chinese University of Hong Kong during 1999-
2000. He was the Professor and Founding Director of the Graduate Institute of

Copyright © 2003 Inderscience Enterprises Ltd.

2 Li, E.Y. et al.

Information Management at the National Chung Cheng University in Chia-Yi,

Taiwan. He holds a Ph.D. from Texas Tech University. His current research
interests are in human factors in information technology (IT), strategic IT
planning, software engineering, quality assurance, and information and systems
management. He is the Editor-in-Chief of International Journal of Electronic
Business, International Journal of Information and Computer Security,
International Journal of Information Policy and Law, International Journal of
Internet and Enterprise Management, International Journal of Internet
Marketing and Advertising.

Joseph R. Biggs is Professor Emeritus of Operations Management in the

College of Business, California Polytechnic State University, San Luis Obispo,
California. He received a Ph.D. degree from The Ohio State University. His
research interests include purchasing, supply chain management, outsourcing,
operations management and quality management. He has published articles in
the following: Journal of Purchasing and Materials Management, Guide to
Purchasing, Management Accounting, Human Resources Planning,
International Journal of Production Research, Decision Sciences, and Journal
of the American Production and Inventory Control Society. He is past president
of the Western Decision Sciences Institute.

Emil A. Thies has been an Assistant Dean of the College of Business Sciences
at Zayed University since August 2001. From 1991 to 2001, Dr. Thies was the
Program Director of the Fort Smith University Center for Arkansas State
University. Prior to that, he was an Associate Professor of management at
California Polytechnic State University in San Luis Obispo, California. Dr.
Thies received his Ph.D. in 1984 from the University of Missouri – Columbia.
He has published numerous articles and proceedings in the areas of service
operations, capacity planning and inventory control.

1. Introduction
Capacity has several definitions (Krajewski and Ritzman 2001, Meredith and Shafer
2001, Heizer and Render 2003) such as design capacity, effective capacity, excess
capacity, short-term capacity, long-term capacity, and constrained capacity. Most
researchers agree that capacity is the ability to produce products or services, and effective
capacity results after considering the available factors of production and limitations
imposed by product design and the process design.
Process constraints limit the actual effective capacity of a production process.
Included in these process constraints are raw material availability, plant location, plant
layout, design and method of processing machinery, skill levels and training of the
process operators relative to the learning curve or manufacturing progress function
(Meredith and Shafer 2001), system or preventive maintenance strategy (or lack thereof)
(Nicholas 1998, Steudel and Desruelle 1992, Bell and Burnham 1991), and replacement
plans for obsolete and inefficient processes (Bell and Burnham 1991, Schonberger 1997).
Although we usually find only the cost of the operator being considered in capacity trade-
off problems, most process constraints are related to the final cost of production.
Constrained capacity is effective capacity which is less than or equal to demand, and
which limits the production output of the system.
The limits on constrained capacity are caused by disruptions in product or
service design (Umble and Srikanth 1990) including the product design itself, product
Int. J. Internet and Enterprise Management, Vol. 3, No.4, 2005 3

quality requirements, required volume, location, price, or any possible combination of

these. Since our goal is to make a profit, and since the market determines the price, then
price minus expected profit is equal to the cost, which can be attributed to the production
function. Thus, the expected price can be a significant factor in the design of the process
capacity.
1.1. The capacity problem
The common capacity problem is not the grossly over- or under-constrained capacity
system, but rather the managerial problem of trying to fine-tune capacity; i.e. planning for
a small increment more or a small increment less than anticipated demand. A better plan
would be to have some small increment of excess capacity.

1 The issues of capacity availability and the impact on system performance caused
by aggregate differences from demand requirements have been explored only
peripherally. This limited research has suggested that the capacity utilization
level at which production systems operate may influence system performance.
Dixon and Silver (1981) found that in a single level, multi-item production
system, as the difference between the production schedule time requirements and
production time available decreased, the system performance also decreased.
Collier (1980), in studying a single item system, reported that capacity constraints
had an effect on lot-size heuristic performance. Biggs (1979, 1985), focusing on a
multi-item system, acknowledged that the capacity utilization level has an effect
on system performance. Schonberger (1997) reported that manufacturers usually
have a ‘herky-jerky’ production schedule, which causes high capacity
management costs. Nicholas (1998) notes that any operation can become a
bottleneck if a large batch is released to it in a short time, while Chase et al.
(2003) note that a capacity constrained resource could become a bottleneck if
scheduled improperly. McClelland (1988) explored the use of finite system
loading through the order promise as a method for better managing the situation of
lumpy production requirements. Her work included the use of inventory to
smooth production and prevent long cycle times; i.e. the period of time elapsed
beginning with receipt of an order and ending with the time the order is promised.

2 These research results indicate that as the available capacity becomes more
constrained, the expected volume of production falls short of expectations. Using
a computer simulated production process, this paper intended to bring a
production system to levels of constrained capacity in order to determine the
causes of less-than-expected output. Of further interest were local managerial
measures or responses that could be implemented to better manage this
constrained capacity condition. In addition the relevant literature of constrained
capacity was examined to determine where the results reported by this paper fit
into the body of knowledge.

2. Literature Review
2.1. Time and other capacity dimensions
4 Li, E.Y. et al.

Capacity is a time-related resource; i.e. if a unit of capacity for this immediate hour is not
used this hour, it becomes a forgone, non-retrievable resource, and much of the attendant
costs are incurred whether or not the capacity to produce is used. If this process causes a
bottleneck, or capacity constrained resource (CCR) (Chase et al. 2003), then the idle time
of the processes before and after the bottleneck is also forgone. The only savings
attributable to this unused capacity are the deferred wages of process operators and
possible ‘wear and tear’ on equipment.
2.2. Bottlenecks.
When two or more processes must be used to manufacture a product, one process is
usually slower than the others and becomes the upper constraint on total volume
throughput; i.e. a bottleneck. Chase et al. (2003) define a bottleneck as being a resource
whose capacity is less than the demand placed on it (Meredith and Shafer 2001), limiting
production volume to all other process linked to it. Capacity constrained resources
(CCRs) are those other processes that are nearly at their capacity limit in relation to
demand (Chase et al. 2003). The prudent manager must maintain an awareness that is
broad enough to include these processes, as well as the bottlenecks, in order to maximise
the output of the system.

………………………..Content is omitted for file size conservation ……………………..

100.0

99.5

99.0
Service Level

98.5
10%
98.0 20%
30%
97.5

97.0

96.5

96.0
248 252 256 260 264 268 272 276 280 284 288 292 296 300

Capacity

Figure 5. Service Level

Int. J. Internet and Enterprise Management, Vol. 3, No.4, 2005 5

Table 6: Sales Level

Forecast Deviation
Capacity 10% 20% 30%
248 12687 12661 12631
252 12699 12668 12649
256 12700 12667 12643
260 12700 12675 12648
264 12700 12674 12647
268 12702 12673 12650
272 12698 12676 12653
276 12700 12676 12654
280 12697 12678 12653
284 12702 12675 12655
288 12701 12679 12656
292 12703 12677 12656
296 12705 12679 12656
300 12703 12680 12657

5. Conclusions and Recommendations

At this point the most interesting findings are that the system did have problems,
as the constrained capacity and the demand were nearly equal. The problem that results
with this situation is that production volume is less than would have been anticipated for
that constrained capacity level. Most successful growing firms at one time or another
will face this problem at least once, and perhaps continually, in their corporate history.
As a firm expands in a growing market, there will be several instances over time when
demand and capacity will be nearly equal before the firm acquires additional capacity. If
these problem situations could be anticipated, capacity could be better managed to
alleviate the production problems as the firm progresses smoothly through these
transitory stages of growth.
Capacity management, from a micro point of view, has been
shown to have merit in that system outputs can be improved by the
manipulation of capacity inputs. This research demonstrates that if a
manager has a source of short-term additional capacity, it may be
advantageous to implement this alternative source of capacity as soon
as the demand/capacity gets out of balance. In a poorly managed
production system one is never certain whether the problem is
constrained capacity or bad scheduling. In a well managed production
6 Li, E.Y. et al.

system, the typical constrained capacity situation is one in which the

imbalance between available capacity and immediate demand is of
short time cycle and of limited excess demand. Therefore, in order to
capture even a part of this momentary excess demand, managerial
response must be timely, but not necessarily massive. If a source or
sources of small, available, unused capacity could somehow be made
available at the time of constrained capacity, many of the problems
would cease to exist. Thus, a better strategy would be not to allow
stockouts and WIP to accumulate and multiply.
In the best-scheduled and best-managed production systems,
there are unanticipated problems that could be helped by some small
amount of safety capacity. But if the system is working at full capacity,
we need to investigate possible sources for this safety capacity. The
traditional sources were described earlier in this paper:
 Use hire-fire method of acquiring additional workers to run the processes if there is
idle processing equipment:
 Overtime, or the use of the current workforce and processes to start work earlier than
usual and work a longer day or work additional time at the end of the work week.
We know this is not possible in a plant that runs 24 hours per day, seven days per
week. Most plants do not work all 21 possible shifts in a week;
 Use inventory to shift production to other time periods, and then use inventory or
backorder to meet the demand, and;
 Subcontract, or outsource, to vendors that needed increment of production capacity.
There are other possible, non-traditional sources. For example, stockouts are a
possible alternative we seldom mention as a solution to the demand/capacity ratio.
However, stockouts and backorders are the method used by custom order shops.
Consider the ‘No Vacancy’ sign at a motel; does that not mean stockout to the next
customer after the ‘No’ part of the sign is turned on? At the point where demand
becomes nearly equal to capacity and production problems arise, one alternative may be
to allow stockouts or to refuse new orders, rather than incur the larger than expected
additional costs of production.
Alternative processes may be used to make up the production gap for the
constrained capacity. We would like the most efficient process to be used, but there may
be other, less efficient processes that could be used to alleviate the constrained capacity.
Perhaps an obsolete machine that has not yet been sold can be pressed into service.
It may be advisable to delay planned preventive maintenance
downtime until another time period, using the current maintenance
time to relieve constrained capacity. As firm believers in preventive
maintenance instead of breakdown maintenance, we do not advocate
this as a long-term solution. However, in most systems, the processes
can operate a bit longer without maintenance, much as our automobile
can go a few extra miles until it is convenient to have the oil changed
If we look around us, there are instances of managers being able
to change their production system so that additional capacity is
available in the short term. At the local grocery store we see many
seemingly unused check-out lanes with their computerised cash
registers sitting idle. When the waiting lines on those check-out lanes
Int. J. Internet and Enterprise Management, Vol. 3, No.4, 2005 7

that are staffed become too long or become bottlenecks, ‘part time’
cashiers are called from other duties that can be delayed until later,
such as shelf restocking, and are pressed into temporary checkout
service.
The plant manager of a local manufacturer noted that the
productive capacity available to him was being ‘diluted’ by set-ups for
various product items. Not only was this making certain processes
bottlenecks, but there was the additional cost of expensive raw
material lost as scrap as part of the setups. This plant manager
decided it was cheaper to acquire more of the least expensive process
machines so that each machine could be semi-permanently setup for a
particular production component and allowed to sit idle when that
component was not needed.
This paper has shown that greater capacity results in better system performance
and that small improvements over the long term may enhance the firm's market share. It
has reaffirmed the phenomenon that as demand approaches capacity constraints, the
problems in the production system multiply. As noted, this research indicates that as the
demand approaches the limits of capacity, order sizes or lot sizes should be decreased to
balance the product flow. The constrained parts of the system should be treated as
bottlenecks per Goldratt (Goldratt and Cox 1984, Goldratt and Fox 1994).
On the other hand, this study has not spotlighted the ratio of system capacity to
scheduled production required to achieve the goals of the JIT practitioners, as noted at the
outset. Obviously, additional research using parameters of each real system is needed to
determine the point at which enough capacity is available relative to cost-benefit analysis.
Research is also needed to determine the sources and types of incremental capacity that
are available to practitioners other than those noted above. Each practitioner will have to
carefully weigh the costs of the incremental additional sources of capacity available and
make decisions based on both the long-term and short-term effects of implementing any
additional capacity. The concept of short-term safety capacity introduced in this paper is
not intended as a permanent solution to constrained capacity, but as a temporary, ‘stop-
gap’ measure. When a production problem is perceived, it is recommended that safety
capacity be brought into play quickly to forestall an accumulation and multiplication of
WIP and unfinished orders. The frequency with which it is needed should act as an
indicator that long-term, permanent capacity should be acquired for that machine or
process.

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